The tendency towards oligarchization, or the formation of large holdings of oligarchs over the course of unjust privatization and their active or decisive influence on state policy, was more pronounced in post-Soviet Ukraine than in any other former republic of the USSR on the European continent. The oligarchs received huge chunks of property not for merit, but thanks to their closeness to the government or even participation in government. For example, at one point the richest man in Ukraine was Viktor Pinchuk, the son-in-law of the second Ukrainian President, Leonid Kuchma. Overall, two large geographically-based clans of oligarchs developed in Ukraine: the Dnepropetrovsk and Donetsk clans. The Donbass region (the Donetsk and Lugansk regions of former Ukraine) is the region with the most concentrated oligarch property. The number one oligarch not only of Donbass but also all of Ukraine during the Euromaidan was Rinat Akhmetov, who comes from semi-criminal circles.

The preservation of oligarch property was contrary to the social slogans of both the Russian Spring and the Euromaidan. The question of nationalizing Ukrainian oligarch property arose at the first stage of the formation of Donbass' independent state authorities. But at this initial stage of the Donbass people’s republics establishment, an absurd system evolved in which the DPR and LPR preserved the Ukrainian oligarchs’ property, i.e., enterprises which paid taxes into Ukraine’s military budget. According to the Ukrainian Ministry of Finance, between the beginning of May 2014 and the end of May 2016, enterprises registered on the parts of the Donetsk and Lugansk regions uncontrolled by Kiev paid taxes, fees, and social contributions (ESV) in the total amount of around 36.8 million hryvnia, or approximately $1.5 billion.

At first the tax payments to Kiev were a necessary measure, as can be seen in an example excerpted from an interview with one of the leaders of the city of Konstantinovka (at that time the territory of the DPR, but currently controlled by Ukraine), Vladimir Bugay. The interview was conducted in mid-June 2014:

Eduard Popov: How does the tax system of the city of Konstantinovka and the DPR as a whole work?

Vladimir Bugay: The Donetsk republic collects taxes which were previously paid into local budgets, while revenue taxes and other taxes are still paid to Kiev so that they'll still pay out our pensions and benefits, because there is no pension system ready here yet.

Popov: That is to say that people receive all their benefits from Ukraine?

Bugay: Up until last [month] everyone received everything. For May [2014] everyone received 100%…I talked with the leadership of the Donetsk republic and they said that we need to move [towards an independent social payments system] gradually. If we cut off everything, then the economy will collapse. Most taxes, it turns out, we take for ourselves, but part of the taxes we give to Kiev so that they pay out our social payments. It works like this: we give them two rubles and they give us back one. So this suits them for now, and they of course pay us, but if they suddenly stop paying, then we’ll try to stop so that their taxes don’t arrive.

The “people’s mayor” of Konstantinovka, Vladimir Bugay, added: “We have many companies working in Donetsk which are registered in other regions and pay all taxes to Kiev, but now the question has arisen about reregistering these enterprises in the Donetsk republics since they’re here.” The owner of the majority of such enterprises is Rinat Akhmetov and, once again in Bugay’s words, “he is not interested in paying taxes to the Donetsk republic. He was proposed this and he refused. Now they’ve declared that if his enterprises are not re-registered in the Donetsk republics by the end of the month, then they’ll be nationalized. Pushilin announced this in one of his latest speeches.”[6]

In practice, however, the leadership of the republic was increasingly compelled to respect the business interests of the Ukrainian oligarchs. According to the experts we interviewed, creatures of the oligarchic groups are present in the leaderships of both republics. The nationalization promised in May 2014 by the then DPR leaders (Pushilin, etc.) did not take place. Similarly to the anti-oligarch promises of the Euromaidan, the Russian Spring's slogans on fighting the oligarchs and building a socially just society did not come to fruition. Yet the reason behind this is deeper and much more complex than the mere presence of influential creatures of the Ukrainian oligarchs in the highest echelon of the DPR and LPR leaderships, although this aspect should not be discounted. Over the course of expert surveys in the DPR and LPR conducted with representatives of political and business circles, the notion was constantly voiced that such a radical dismantling of the existing economic model would have led to the standstill of Donbass’ large enterprises and would have thus deprived a minimum of dozens of thousands of people of work which, along with their families, would mean hundreds of thousands without a livelihood. However, all the interviewed political and business elites noted that the preservation of Ukrainian oligarch property and the continuation of payments into Ukraine’s war budget are a dead end road.

But the problem is not only that the Donbass republics are financing the war against themselves through the tax deductions for the Ukrainian budget from enterprises belonging to Ukrainian oligarchs. What's more, the oligarchic capitalism which developed in Ukraine is economically unviable, is not competitive, and contradicts principles of social justice. Broad segments of the DPR and LPR population dream of building a more just state which might be called a form of new "Russian socialism" free from the doctrinal errors of the USSR and oligarchic/neo-Nazi Ukraine.

This situation began to change in February 2017. The President and Cabinet of Ministers of Ukraine supported the blockade of Donbass organized at the end of 2016 by Ukrainian neo-Nazi groups in the so-called ATO zone. Ukrainian President Petro Poroshenko ordered the temporary suspension of all goods, except those of a humanitarian nature, from being transported across the contact line between Ukrainian-controlled territory and the “pro-Russian separatist occupied” districts of Donbass. This was a direct violation of the Minsk Agreements, specifically Point 8 which provides for the full restoration of socio-economic ties between the Donbass republics and Ukraine.[7] This decision of President Poroshenko on March 15th, 2017 was formalized in a decree of the Council of National Security and Defense of Ukraine on the same day.

The blockade of Donbass, at first de-facto and then de-jure, provided the Donetsk and Lugansk People’s Republics' authorities with grounds to introduce external management at Ukrainian enterprises located on the republics’ territory starting March 1st. Back on February 27th, during an extraordinary plenary meeting of the People’s Council of the DPR, deputies had adopted upon second reading a bill on amending the republic’s tax system.[8] A corresponding decision was adopted by the LPR’s parliament. The essence of these amendments boiled down to an ultimatum: Ukrainian citizens’ enterprises in the DPR and LPR must be re-registered to pay budgets into the people’s republics budgets by March 1st 2017. The ensuing decrees on introducing external management at recalcitrant Ukrainian enterprises in the DPR and LPR are being implemented, and enterprises belonging to Ukrainian oligarchs are continuing to work despite their owners’ resistance. Difficult and not always successful work on reorienting target markets is ongoing.

Here we intentionally put a period and will temporarily discontinue our analysis of the socio-economic situation in the republics, to which we hope to devote a separate article. How the social security systems in the DPR and LPR are structured is a separate issue altogether which we will discuss in our next piece.

Conclusion

In economic, social, and political terms, the Donbass republics represent a fragment of post-Soviet Ukraine bearing all the characteristics of its economic system and managerial caste, such as an obsolescent technological base and production equipment, corruption, an incompetent bureaucracy, incompetent political class, “African-style” income inequality between different social groups, etc. The preservation of Ukrainian oligarch property on the territory of the DPR and LPR in fact prevents one from speaking of real sovereignty of the republics. Until recently, Ukrainian oligarchs’ enterprises paid into the Ukrainian budget and, as follows, financed the war against the people of Donbass. Since February 2017, contradictory processes of de-oligarchization and building a more just economic model from the national and social points of view are underway. At the current moment, there is still not enough material to draw conclusions.

Towards what socio-economic system will the people’s republics of Donbass gravitate? Will a “national capitalism” variant be realized here (emphasizing the enterprises earlier belonging to the Ukrainian oligarchs) or will a new form of “Russian socialism” be built? Or will oligarchic capitalism, in some modified form, be retained? The nationalization of the oligarchs’ property cannot in itself guarantee successful socio-economic development, as one result of such could be the replacement of the old class of large proprietors with a new caste of oligarchs, which has already been forming in the Donbass republics.

The DPR and LPR have, in the most difficult conditions, succeeded in defending their independence from the current Kiev government and have successfully formed an armed forces of Donbass (the People’s Militias of the DPR and LPR). Since spring 2015, social services have started working, the threat of mass starvation has been eliminated, and the elderly population of the DPR and LPR has been receiving pensions. Thanks to Russia’s gratuitous aid, the republics of Donbass are in the very least no lower in socio-economic terms than the neighboring regions of Ukraine. What’s more, thanks to Russia’s help, the state is fulfilling its minimum commitments, including in issues of price-setting - utilities cost significantly less than in Ukraine, etc.

It is obvious that without Russia’s continued assistance, the Donbass republics, even assuming successful social and economic reforms, would be unviable entities. The only guarantee of their future successful development is economic, social, and humanitarian integration of the DPR and LPR into the Russian space along the South Ossetian and Abkhazian model. The future of the republics of Donbass might be determined by the political processes and disintegration tendencies which are continually evolving in Ukraine.